Uganda: Inquiry Into Bank Collapse Misses Causes of Regulatory Failure

Bank of Uganda (file photo)
15 November 2018

The first round of questioning at Parliament into the collapse of banks in Uganda started off with Teefe, a small bank associated with the Buganda government that was shut down in the early 1990s after failing to meet statutory capital requirements.

Between 1994 and 2008, a number of banks lost their licences, the largest of which was Greenland Bank. Others were the International Credit Bank owned by the Katto family (Sanyu group of companies), Cooperative Bank and Global Trust Bank.

A number of other financial institutions like Continental Housing, Alliance Building Society also wound up. Luckier ones like Nile Bank were absorbed by bigger banks. Sembule Investment Bank was sold off to Banque Begolaise and later became Bank of Africa.

After 2008, in the place of these indigenous banks, the older chartered banks like Barclays, Standard & Chartered Bank remained around. A flood of regional banks came in from Kenya, including Equity Bank, KCB, CBA Africa, NIC Bank. Ecobank, UBA Bank, Global Trust Bank came in from West Africa. From Asia or Asian pedigree, Bank of India, Imperial Bank, Top Bank, Mercantile Bank, etc.

In the indigenous segment, only two banks rose from the ashes of the hubris of the late 1990s, Crane Bank which miraculously built itself from ashes into the nation's fifth largest bank with a national banking network. Centenary Bank associated with the Catholic Church, was close behind. A smaller entity whose first specialty was servicing donor funds, dfcu became a fully-fledged commercial bank.

The policy of the Central Bank with regard to licensing commercial banks was buttressed onto the bigger government policy of liberalisation of the financial sector. Government on its part divested 90 per cent of its shares in Stanbic Bank (formerly UCB) first to Standard Group and later floated shares on the Stock Exchange. It sold its shares in banks it had partly nationalised in 1969. It pulled the rug from Cooperative Bank whose assets were wiped out in the Bush War and later by massive inflation just before and after currency exchange in 1987.

The Central Bank also indirectly promoted another policy that severely limited licensing of banks to Ugandan nationals. Questioned a few times, the Central Bank Governor, Emmanuel Tumusiime Mutebile, mentioned he did not mind that all banks were foreign-owned. This question seemed to cover Crane Bank, which had a dominant local shareholder, but imported 49 out of 50 of its top managers from abroad.

While the collapse of the bevy of smaller banks was mostly linked to insider lending, poor management controls, conflict of interest and a volatile economy, the collapse of Crane Bank is on a much bigger or gigantic magnitude. The central questions to be asked of current management are how Crane Bank maintained its banking licence even when it fell below statutory minimums of working capital.

Second, why the safety and soundness measures to limit concentration of ownership of the bank were not applied with respect to the bank. Third, why key regulatory persons opened themselves up to conflict of interest by getting favours from what was as early as 2014-2015, a troubled bank maintaining bank loans, accepting indirectly appointments from the same bank for their relatives etc.

The public also needs to know why government sheltered some of the bad loan book borrowers from collection activity. This nearly wiped out the capital of Bank of Uganda, which has been limping financially since the 2000s global economic crisis.

First the Central Bank stated that the bad loans had been sold to dfcu, then recanted and stated it kept the bad loans on its books. These borrowers matter of fact continued to flourish in their enterprises after they won a reprieve from collection. The public also needs to know why Bank of Uganda operational independence continues to deteriorate. Bank of Uganda issues are resolved in State House, not inside the Central Bank.

Mr Ssemogerere is an attorney-at-Law and an advocate. [email protected]

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